Rising food prices are behind the riots in Egypt.  Where’s the investment opportunity?

The media tend to cast the riots in Egypt as political.  But a more insightful analysis suggests otherwise.

Just as bad harvests in 1788 triggered the French Revolution, food price inflation lies behind the mass demonstrations in Tunisia, Egypt, Yemen and beyond.  The protests across North Africa were triggered by the self-immolation of Mohamed Bouazizi, a Tunisian fruit vendor who was protesting against police confiscation of fruit and vegetables he was trying to sell on the street.

Egyptians are running out of food.  Bread, beans and rice – all staples for Egypt’s 80 million people – are in critically short supply.  When people are hungry, social upheaval is sure to follow.

3 macro factors are driving higher food prices and creating strong demand for commodities:

1) Growing population.  The world’s population grows by 73 million people each year which steps up demand pressure on the world’s food supply.

2) Growing middle class in developing world, especially China.  About 95% of the world’s population growth in happening in the emerging world.  As people get richer, they eat more meat.  This puts extra pressure on the grain supply, since it takes 5kg of grains to produce 1kg of meat.  Millions of people also move from rural areas to cities causing the amount of available farmland to shrink.  This increases supply pressures.

3)  Climate destabilization. Freak weather events – such as the recent droughts in Russia, late rains in Argentina, floods in Australia – are wrecking crops and severely limiting the amount of food we can produce.  Governments are also doing more to try to reduce carbon buildup in the atmosphere.  One solution is biofuels which use up corn and sugar supplies and drive up prices.

But spiking food prices are also happening against the backdrop of Ben Bernanke’s money printing operation, the QE2.  When trillions of new dollars are pumped into the system, people start to fear inflation.  When people are fearful of inflation they buy hard assets that will rise along with the rising tide of liquidity.  Gold and oil are well-known inflation hedges.  But investors are also turning to agricultural commodities to protect their wealth.

Bernanke is doing what central banks do best.  He’s blowing bubbles to try to keep stock market prices afloat.  Bernanke says he’ll turn off the money spigots as soon as he sees a big uptick in inflation.  But how can he when he insists on measuring inflation by the movements of the Consumer Price Index, which leaves out food and energy prices from its mix?

How to Play It…

The best way to play this situation is by investing in agribusiness that help farmers increase crop yields.  Stocks of fertilizer companies like Mosaic (MOS), Potash (POT) and Agrium (AGU) have been on fire and are still my favorites.

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